Bank of England To Cut Interest Rates to Lowest Ever - Will the British Pound Sell Off?

Written by Ilya Spivak, Currency Analyst

The British Pound kept to a narrow, well-defined range in overnight trading as traders brace for the coming interest rate announcement from the Bank of England. Expectations call for a 50 basis point cut to bring rates to 1.50%, the lowest since the central bank’s creation.

Key Overnight Developments

• Australian Trade Surplus Shrink As Exports Falter
• Euro Rises, British Pound Trades Sideways Against US Dollar


Critical Levels

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The Euro rose against the US Dollar in overnight trading, testing above the 1.3650 level. The British Pound remained range-bound, confined to a narrow 60-pip band below 1.5090.


Asia Session Highlights

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Australia’s Trade Balance surplus narrowed more than economists expected in November, printing at A$1.45 billion. The result was driven by a sharp 3.6% drop in exports, the first negative reading in nine months. Looking Australia’s top trading partners, shipments to the UK were hardest hit, declining by a whopping -46.5%. Exports to China and the US also saw double-digit drops, falling -18.7% and 10.7%. Rounding out the top six markets that absorb well over half of all Australian exports, shipments to New Zealand fell -7.8% while those to India declined -3.9%, with only Japan seeing positive growth of a meager 2.8%. Waning global demand has seen business confidence fall to record lows and put upward pressure on unemployment. This will surely weigh on disposable incomes and prompt precautionary saving in the months ahead, threatening the larger antipode with the possibility of recession. The Reserve Bank of Australia has aggressively cut interest rates by a full 3% since September and is likely to continue to do so in an attempt to check the slide in economic growth. Traders are pricing in a 0.75% cut when Glenn Stevens and company announce policy on February 2nd.


Euro Session: What to Expect

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The interest rate announcement from the Bank of England headlines the economic calendar in European hours. A survey of economists conducted by Bloomberg calls for a 50 basis point cut to bring borrowing costs to 1.50%, a new all-time low. Minutes from December’s BOE meeting (released over 2 weeks ago) showed the MPC had wanted to cut more than 100bps at that time but held back to avoid an “excessive” drop in the British pound. This suggests the markets have had ample time to price in a dovish bias. Indeed, trading in overnight index swaps sees traders pricing in a 0.50% cut ahead of the decision. On balance, this means that a move in line with expectations is unlikely in and of itself to stir much volatility. As noted by DailyFX Strategist Terri Belkas, the language of the announcement will be far more important in shaping market sentiment towards the sterling.

In Switzerland, the Unemployment Rate is set to rise to 2.9% in December, the highest in over a year. Firms are cutting back capacity as the global slowdown dwarfs overseas demand. Indeed, industrial Production fell to the lowest level in over 2 years in the third quarter. Exports make up a whopping 59% of overall economic growth, with machinery, chemicals and metals topping the list of items being sold abroad. Rising unemployment will crimp disposable income and weigh on consumer spending. An average of economists’ projects suggests GDP growth will grind to a standstill in 2009. Slowing activity will weigh on price growth, with the Consumer Price Index set to show inflation at 0.9% in the year to December, the lowest in 15 months. Interest rates are already at just 0.50%, with the Swiss National Bank likely to follow the US Fed down the path of quantitative easing as deflation becomes a growing concern.

Germany’s Trade Balance is likely to shrink on slowing exports. Yesterday, unemployment grew more than expected as companies cut capacity in the face of withering global demand. Indeed, Factory Orders and Industrial Production have both fallen to record lows. This will invariably weigh on consumer spending and deepen the slump in economic activity. A survey of economists conducted by Bloomberg forecasts the economy will shrink -1.45% in 2009.

Euro-Zone Economic Confidence Slumps to Record Low on Global Recession

Written by David Song, Currency Analyst, Geng Chen, DailyFX Research

Economic confidence in the Euro-Zone fell to its lowest level since recordkeeping began in 1985 as the index plunged to 67.1 from 74.9 in November and unemployment rate increased to a two-year high of 7.8%, which suggests that the real economy is now feeling the spillover effects from the financial crisis.

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Fundamental Headlines

• Lenovo Expects Loss, Plans Major Revamp – Wall Street Journal
• Wal-Mart Elevates Sam's Chief McMillon – Wall Street Journal
• RBS eyes sale of £2bn Chinese stake – Financial Times
• Satyam Founder’s Fake Reports Threaten Software Maker – Bloomberg
• Intel, Time Warner Shortfalls Signal Further U.S. Forecast Cuts – Bloomberg

EURUSD – Economic confidence in the Euro-Zone fell to its lowest level since recordkeeping began in 1985 as the index plunged to 67.1 from 74.9 in November. As a result, the consumer confidence index slipped to -30 from -25 amid expectations for a 1 point drop to -26, while sentiment among businesses fell to -3.17 from a revised reading of -2.10 in the previous month. Meanwhile, the unemployment rate increased to a two-year high of 7.8% from 7.7% in October, which suggests that the real economy is now feeling the spillover effects from the financial crisis, and will likely push the jobless rate higher this year as financial uncertainties linger. Furthermore, the final GDP reading for the third quarter was confirmed at -0.2%, while the annual rate of growth held steady at 0.6%. Nevertheless, German factory orders plunged another 6.0% in November, which was followed by a 6.3% decline in the previous month, and conditions are likely to get worse as demands from home and abroad falter. The data reflects a dour outlook for the 16 economies operating under the euro, and may lead the European Central Bank to ease policy further over the coming months as growth prospects deteriorate at a record pace. Discuss the topic and your trade ideas in the EUR/USD Forum.

CHFUSD – Price growth in Switzerland slowed more than expected as it fell to its lowest level in 15 months. The consumer price index slipped 0.5% after falling 0.7% in previous month, which lowered the annual rate of inflation to 0.7% from 1.5% in November. The breakdown of the report showed that energy prices dropped another 8.0% following an 8.2% contraction in the previous month, while transportation costs fell 1.9% during the month. Meanwhile, Switzerland’s unemployment rate increased to 2.8% from 2.7% in November as fading demands from the home and abroad led companies to scale back production and employment. Easing price pressures would allow the Swiss National Bank to leave borrowing costs at 0.50% for a longer duration in response to the economic downturn, and may decide to ease policy further as policymakers expect economic activity to deteriorate throughout 2009. For more news and resources, visit the new Swiss franc Currency Room.
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US Dollar Slips as Consumer Credit Falls By Record, Non-Farm Payrolls (NFPs) Expected to Fall By 500K or More

The US dollar fell versus most of the major currencies on Thursday, save the Australian dollar, as consumer credit fell by the most in at least 65-years and continuing jobless claims reached a new 26-year high. According to the Federal Reserve, consumer credit in the US fell for the second consecutive month by a record $7.9 billion in November. More specifically, non-revolving debt, such as auto or student loans, tumbled by $5.2 billion and revolving debt, such as credit cards, declined by $2.8 billion. Overall, this highlights a shift in attitude amongst Americans away from the feeling that they could spend freely on designer goods with the help of credit cards toward a far more risk averse sentiment in which consumers opt to pay down debt and spend conservatively. Ultimately, this will be a negative for high-end retailers and stores that do not have the ability to offer deep discounts, as they essentially performed well only when consumers had no inclination to save.

Meanwhile, US initial jobless claims fell by 24,000 during the week ending January 3 to 467,000, but as we mentioned last week, employment reports for the last two weeks of 2008 should be ignored as the closure of government offices on the holidays, such as New Year's Day, skew the numbers. However, this makes the results of the count of continuing jobless claims even worse, as they rose by 101,000 to a fresh 26-year high of 4.611 million during the week ending December 27 despite the fact that fewer people would be able to file claims. This does not bode well for tomorrow's releases at 8:30 ET, as US non-farm payrolls (NFP’s) are forecasted to fall for the twelfth straight month in December at a rate of -520,000. Something that is garnering even more attention though is the rise in the unemployment rate, which is predicted to match the June 1993 high of 7.0 percent from 6.7 percent. Results in line with or worse than expectations would suggest that consumption, and growth in general, will continue to wane throughout 2009, and could weigh on the greenback.

Related Articles: US Dollar Could Dive on NFPs - Euro, British Pound May Also Face Bearish Data, US Dollar Weekly Forecast


Euro Ends Day Just Below Key Resistance - Will Euro-zone Retail Sales Weigh on Friday?

The euro continued to edge higher versus the US dollar, but major resistance at 1.3750 is blocking the pair’s way higher. Economic data out of the Euro-zone still suggests that the European Central Bank will cut rates next Thursday, but as we saw with the British pound and the Bank of England’s rate cut today, that doesn’t mean the currency will automatically fall lower. Nevertheless, looking at the data on hand, a measure of confidence amongst European consumers and executives fell during December to the worst level since record keeping began in 1985, suggesting that consumption is sure to slow further and businesses are far less prone to invest. Furthermore, the Euro-zone’s unemployment rate rose to a two-year high of 7.8 percent in November from 7.7 percent, and given the dour outlooks for the economy, the deterioration of the labor market is likely to worsen. Friday’s data should add to this gloomy mix, as retail sales growth in the Euro-zone is forecasted to have stagnated during the month of November, leaving the annual rate negative for the sixth straight month. Such a result would be in line with the steady drop in the Purchasing Managers' Index (PMI) for the Euro-zone services sector, which has signaled a contraction in business activity throughout the second half of 2008. In fact, given this correlation, the timelier PMI results suggest that retail sales will remain weak not only in this reading for November, but for December as well. The impact on the euro should be minimal, barring a sharp, unexpected decline.

Related Article: Top Forex Trades for 2009


British Pound Surges Following Bank of England’s Rate Cut - Why?

The British pound remained strong on Thursday, gaining against every major currency except the Japanese yen and Canadian dollar, despite the fact the Bank of England cut the Bank Rate to the lowest level since the bank was founded in 1694. What gives? First of all, the BOE’s 50 basis point reduction was in line with expectations, so there was no surprise factor coming in to play. Meanwhile, though the Monetary Policy Committee’s (MPC) subsequent policy statement was quite bearish on economic conditions in the UK and abroad, they did not give any indication that they would cut rates again during their February 5 meeting. In essence, the British pound’s rally today indicates that the currency’s nearly 30 percent drop against the US dollar and 53 percent plunge versus the Japanese yen over the past 6 months has gone above and beyond pricing in rate cuts by the BOE. At this juncture, actual rate cuts are having little impact on the currency markets, as traders are more focused on comparative long-term interest rate expectations.

Related Article: GBPUSD - British Pound Predicted to Rally Further vs US Dollar


Canadian Dollar Could Pull Back on Friday

The Canadian dollar held its own against the US dollar on Thursday, despite the release of disappointing data, as the Ivey Purchasing Managers’ Index (PMI) tumbled to a record low of 39.1 in December. This marked the second straight month that the index held below 50, which signals a deterioration in business activity, and a further breakdown of the report also shows that employment conditions contracted for the fourth consecutive month. This reading suggests that Friday’s releases could have bearish implications for the Loonie, as the Canadian net employment change is forecasted to have fallen by 20,000 during December while the unemployment rate is anticipated to have risen to a nearly three-year high of 6.5 percent from 6.3 percent. Since the employment change tends to be a very volatile release, this should have the greatest impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

**For a full list of upcoming event risk and past releases, go to the DailyFX Calendar


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Written by: Terri Belkas, Currency Strategist for DailyFX.com

Forex Traders to Look Past European Data as Non Farm Payrolls Loom Ahead (Euro Open)

Forex traders are likely to look past the European economic calendar as most of the upcoming news likely to have already been priced into the market, eyeing a dour US Non Farm Payrolls report that is set to show the economy shed 525 thousand jobs in December. Overnight, Japan’s Leading Index fell to a decade low, suggesting the recession in the world’s second-largest economy deepening

Key Overnight Developments

• Japan’s Leading Index Falls to Lowest in 10 years
• Euro, British Pound Correct Lower Against US Dollar


Critical Levels

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The Euro continued to decline in overnight trading having found resistance just below 1.38 in early New York hours. Prices found near-term support at 1.3634, the 61.8% Fibonacci retracement of the intraday rally. The British Pound consolidated in a narrowing wedge around the 1.52 mark overnight after retracing as low as 1.5121 from the New York session high at 1.5373.


Asia Session Highlights

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Preliminary estimates of Japan’s Leading Index saw the measure fall to 81.5 in November, the lowest in a decade. The index is a composite of 12 economic indicators including manufacturing orders and stock prices and is intended to foreshadow the direction of the broad economy in the following 6 - 9 months. The measure declined -3.7% from the preceding month, suggesting the recession in the world’s second-largest economy deepening. Indeed, recent data has shown record high unemployment and rapidly shrinking consumer spending. The slower pace of economic activity has brought inflation down significantly, giving the Bank of Japan room to maneuver as they attempt aggressive new measures that look beyond lowering the already near-zero benchmark interest rate.


Euro Session: What to Expect

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German Retail Sales are expected to add 0.5% in December to lift the annualized growth rate from negative territory to 0.0%. The meager improvement is foreshadowed by a better-than-expected Retail PMI survey: the reading rose to 42.3 in December from 41.3 in the preceding month as stores saw a shallow uptick in activity around the holiday season. Importantly, the boost to sales failed to bring retail sector sentiment out of contractionary territory (a reading below 50 means pessimists outnumber optimists surveyed for the PMI) because it was achieved through sharp price discounts, eating away at firms’ operating margins. On balance, this likely means more job cuts as retailers cut capacity after spending falls back to pre-holiday levels. Earlier this week, unemployment grew more than expected and is likely to continue to expand as both domestic and overseas demand is dwarfed by the spreading global slowdown. This will weigh on disposable incomes and spur precautionary saving, suggesting traders are unlikely to see much follow-through to December’s improvement. The broader Euro Zone Retail Sales are expected to print down -1.7% in the year to December, the fifth consecutive month of decline. Deepening recession saw initial estimates of December’s CPI print lower than expected earlier this week, suggesting the European Central Bank is likely to continue to slash borrowing costs. Traders are currently pricing in a 25-50 basis point interest rate cut when the ECB announces policy next week.

In the UK, Producer Prices are set to shrink -0.6% in December to bring annualized wholesale inflation to 4.0%, the lowest in 14 months. The result hints at continued decline in consumer price growth (the benchmark inflation gauge) as firms pass on falling production costs by discounting finished items. Yesterday, the Bank of England cut interest rates by 50 basis points to 1.50%, the lowest since the bank’s creation in 1694. Although Mervyn King and company shied away from promising further easing, trading in overnight index swaps points to another 0.25% cut in February and bond yield forecast see rates falling as low 0.50% by the second quarter.

On balance, traders are likely to look past the European data docket, with most of the upcoming news likely to have already been priced into the market. The US Non Farm Payrolls release will dominate attention late into the session, with expectations saying the economy shed 525 thousand jobs in December. Traders have treated the health of the US economy as proxy for that of the globe at large, betting that a recovery for the world’s largest consumer market will offer positive spillover elsewhere.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

Euro Finds Support On Improved Retail Sales, Markets Focus On NFP Report

A better than expected Euro-Zone retail sales report woke up currency markets which had been consolidating ahead of the U.S. Non-Farm payroll report. The Euro jumped 50 bps when the consumption report showed a 0.6% gain in November versus expectations of flat sales.

Talking Points
• Japanese Yen: Finds Support At 90.60
• Pound: Manufacturing Falls For Ninth Month
• Euro: Retail Sales Improved n November
• US Dollar: NFP On Tap

Euro Finds Support On Improved Retail Sales, Markets Focus On NFP Report

A better than expected Euro-Zone retail sales report woke up currency markets which had been consolidating ahead of the U.S. Non-Farm payroll report. The Euro jumped 50 bps when the consumption report showed a 0.6% gain in November versus expectations of flat sales. A 0.5% gain in food sales led the improvement from the month’s prior 1.0% decline. Germany led the way with a 0.7% increase, with developing nations Poland and Romania also seeing improvements. The Euro would reach as high as 1.3732 before finding resistance as traders are reluctant to make major bets ahead of the U.S. labor report.

The improvement in consumption may have little longer term implications for the Euro as recent evidence that the economy’s downturn has steepened will dampen expectations. Manufacturing and service activity in the region has contracted for the past seven months which is forcing companies to slash costs. Therefore, expectations are that the labor picture which saw unemployment rise to 7.8% in November will continue to deteriorate going forward. Nevertheless, any positive data may be enough for the ECB to justify refraining from further easing. Yet, with process continuing to free fall the mounting deflation concerns may leave the central bank no alternative as they adhere to their price stability mandate.

The Pound traded choppy during European trading as it fell to 1.5118 after reaching a high of 1.5269 on weak manufacturing data and falling producer prices. However, the Sterling would find support from the positive European retail sales numbers on expectations that a weak pound will lead to greater future demand. Indeed, the BoE cited the currency’s weakness as a source of stimulus as it creates greater demand for U.K. products and a reason that they weren’t more aggressive in their easing. However, November’s manufacturing data demonstrates that the benefits haven’t started to be realized as activity fell for a ninth month to its lowest levels since 1980. The 2.9% decline was led by a 6.2% drop in chemicals and an 11.0% fall in metals as the global slowdown has dampened demand for raw materials. Meanwhile, factory gate prices fell to 4.7% from 5.1%, but were far greater than the 4.0% that was predicted which may lead the BoE to pause their current easing cycle. The Pound appears to be settling into a range between 1.4500- 1.500 where it could trade for sometime as markets look for signs as to which economies will be the first to emerge from the current downturn

The estimates for the upcoming Non-Farm payroll report have continued to fall from initial prediction of -475,000 to the current if 525,000. Wednesday ADP report which was reconfigured to take into account similar factors as the NFP release showed job losses of 693,000 for December which has some market participants looking for a loss of as high as 1 million. Therefore, we could see bearish price action if the labor report significantly misses to the downside. Conversely, with such low expectations an inline or better print may spark bullish price action as it would reinforce notions that the U.S. is best positioned to emerge from the current economic downturn. Another number to watch will be the unemployment rate, which is expected to shoot to 7.0% from 6.7%. An inline or worse print will increase fears that the jobless rate will climb to as high as 9.0% which will dim the outlook for domestic growth and a potential turn around in 2009.

Canada Sheds 34.4K Jobs In December, Unemployment Rate Hits Three-Year High

• Plan to Cut Foreclosure Rate Clears Key Hurdle – Wall Street Journal
• Lehman Brothers Plans Private-Equity Spinoff – Wall Street Journal
• Citi exposed to $1.4bn loss over LyondellBasell – Financial Times
• Gross Wins ‘Game of Chicken’ Shunning GMAC Swap as Bonds Soar – Bloomberg
• Germany Offers GM’s Opel as Much as $2.5 Billion – Bloomberg

USDCAD – The Canadian economy shed 34.4K jobs in December after losing 70.6K jobs in the previous month, which raised the annual rate of unemployment to a three-year high of 6.6% from 6.3% in November. The downturn in the global economy paired with financial uncertainties have dragged on growth throughout the fourth quarter of 2008, and as the U.S., Canada’s biggest trading partner, faces its longest recession in over a quarter century, employment conditions are likely to get worse throughout the first half of this year. Discuss the topic and your trade ideas in the USD/CAD Forum.

EURUSD – Retail spending in the Euro-Zone increased 0.6% in November after falling 1.0% in the previous month, and raised the annual rate of consumption to -1.5% from a revised reading of -2.3% in the previous month. Moreover, private-sector spending in Germany rose 0.7% from a revised reading of -2.2% in October on the back of lower energy costs. Meanwhile, fading demands from the global economy led German businesses to cut outputs for the third consecutive month as industrial production plunged 3.1% in December. The worst slump in over a decade lowered the annual rate of production to -6.4% from -3.7%, and conditions are likely to get worse as growth prospects for Europe’s largest economy deteriorates at a rapid pace. However, falling oil prices could help consumers to deal with the slowdown in the economy, and may lead the ECB to lower borrowing costs even further as price pressures alleviate. Discuss the topic and your trade ideas in the EUR/USD Forum.

GBPUSD – Output prices in the U.K. held flat in December amid forecasts for a 0.6% decline, while the annual rate of inflation slipped to 4.7% from 5.1% in the previous month. In addition, the core measure for outputs were unchanged at 5.0% despite expectations for a drop to 4.7%. The breakdown of the report showed that energy costs fell 4.3% during the month, while a 0.8% rise in food and tobacco offset the fall in oil prices. Meanwhile, input prices tumbled another 2.0% during the month on the back of lower energy costs, which was followed by a 3.0% drop in November. Nevertheless, industrial production fell 2.3% in November, followed by a 1.7% contraction in the previous month, which lower the annual reading to -6.9% from -5.2% in October - the weakest reading since March 1981.The data continues to reflect a dour outlook for the Europe’s second largest economy, and reinforces the Bank of England’s concern for deflation as price pressures continue to fall at a rapid pace. Discuss the topic and your trade ideas in the GBP/USD Forum.

Euro Vulnerable to a Decline Below 1.33

The AUDUSD has reached initial resistance from the confluence of the October 14th high / 38.2% of .9856-.6005 at .7247/56. The structure of the decline on very short term intraday charts (15 min) is promising from a bear’s perspective (decline looks impulsive). Even if wave (2) is not complete, it is likely that the rally from .6005 would experience a sizeable retracement because it is in 3 waves (a flat with structure 3-3-5 could unfold). Coming under .6956 would warrant a bearish bias.

US Dollar Strength May Hinge Upon Risk Trends Once Again

The US dollar ended the week mixed across the majors, as the currency tumbled against the British pound, which was strong across the board, but also slipped versus some of the commodity dollars on a brief pick up in risk appetite. However, the US dollar’s biggest rally of the week was on Friday, after data showed that US non-farm payrolls fell by a whopping 524,000 in December and brought the cumulative total of job losses in 2008 to 2.589 million, the most since 1945. Meanwhile, the unemployment rate rose more than expected to a 16-year high of 7.2 percent from 6.8 percent. So why did the US dollar rally in response? There are a few reasons. First, most of the major currency pairs remain within massive ranges, but major support levels for the US dollar helped to stabilize its decline. From a fundamental perspective, it is necessary to consider the fact that interest rates in the US can't really go any lower since the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent, and it is that interest rate dynamic (or lack of it), that is allowing the greenback to brush off this abysmal data. Furthermore, a sharp drop in the Dow Jones Industrial Average and surge in the Japanese yen on the same day suggest that risk aversion is lingering in the financial markets.

When looking ahead to the next week of trading, it will be important to keep the status of risk trends in mind, especially given the event risk on hand. On Tuesday morning, Federal Reserve Chairman Ben Bernanke is scheduled to speak in London on the financial crisis and policy response, and this could prove to be one of the biggest market-movers of the week due to its potential impact on risk sentiment. If Chairman Bernanke is bearish on prospects for the financial markets and global economy, his comments could have very negative repercussions for the stock markets, and we could see flight-to-quality spark demand for Treasuries, the US dollar, and Japanese yen. On the other hand, if he announces a new type of policy action or if he manages to inspire confidence that conditions will not get significantly worse, risky assets could rally.

Other indicators to watch include advance retail sales, which are forecasted to show that US retail sales fell negative for the sixth straight month in December. This is particularly negative because the holiday shopping season is supposed to be a boon for retailers, but even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. Meanwhile, the release of the December reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months. Indeed, CPI is forecasted to have plunged 0.9 percent during December while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.1 percent. Excluding volatile food and energy prices, though, core CPI may have risen a slight 0.1 percent during the month, leaving the annual rate to edge down to a more than 4-year low of 1.9 percent from 2.0 percent. Overall, the news could weigh on the US dollar if the headline CPI figure does indeed fall negative.